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The Excess Sensitivity of Long-term Interest rates and Central Bank Credibility

Kwangyong Park

No 2020-29, Working Papers from Economic Research Institute, Bank of Korea

Abstract: Long-term interest rates show considerable reactions to macroeconomic and monetary policy news. It is, however, difficult to be explained by standard rational expectations macro-finance models widely used in policy analyses. In this research, we demonstrate that private¡¯s subjective beliefs and central bank credibility can account for the excess sensitivity of long-term interest rates using an estimated macro-finance model which incorporates private¡¯s subjective perceptions on future real activity and inflation and endogenously evolving central bank credibility. We find that long-term rates respond stronger to macro shocks and shifts in private's perceptions regarding expected real activity and inflation when credibility is lower. In addition, the model simulation shows that 10-year yield varies substantially more when credibility is low.

Keywords: Monetary Policy; Credibility; Term Structure; Excess Volatility (search for similar items in EconPapers)
JEL-codes: D80 E03 E43 E58 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2020-12-16
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https://www.bok.or.kr/ucms/cmmn/file/fileDown.do?m ... 00000021020&fileSn=1 Working Paper, 2020 (application/pdf)

Related works:
Journal Article: The excess sensitivity of long-term interest rates and central bank credibility (2022) Downloads
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